3.3 Revenues, Costs And Profits Flashcards
What is total revenue (TR)?
The total amount of money coming into the business through the sale of goods and services: quantity x price
What is average revenue (AR)?
The total revenue divided by output
Define marginal revenue (MR).
The extra revenue that the firm earns from selling one more unit of production
What is the relationship between price elasticity and marginal revenue?
If MR is positive, demand is elastic; if MR is negative, demand is inelastic; if MR=0, demand is unitary elastic
True or False: In perfect competition, MR=AR=D.
True
What characterizes a downward sloping demand curve?
Price decreases as output increases, indicating some price setting power
What happens to total revenue (TR) when marginal revenue (MR) is positive?
TR increases as output increases
What occurs at the point where MR=0?
Total revenue is maximized
What is the economic cost of production?
The opportunity cost of production; value that could have been generated in the next best use
Differentiate between total fixed cost (TFC) and total variable cost (TVC).
TFC does not change with output; TVC changes directly with output
What does the average total cost (ATC) represent?
Total costs divided by output
Fill in the blank: The law of _______ states that if a variable factor is increased when another factor is fixed, marginal output will decrease.
Diminishing Returns
What shape is the average total cost curve (ATC) and why?
U-Shaped due to the law of diminishing marginal productivity
When does the marginal cost (MC) curve intersect the average cost (AC) curve?
At the lowest point on the AC curve
What is the minimum efficient scale?
The minimum level of output needed for a business to fully exploit economies of scale
What are internal economies of scale?
Advantages a firm enjoys due to its own growth
Name two types of internal economies of scale.
- Technical economies
- Financial economies
What are diseconomies of scale?
Disadvantages that arise in large businesses that reduce efficiency and cause average costs to rise
What are external economies of scale?
Advantages arising from the growth of the industry, independent of the firm
How do large firms benefit from purchasing economies?
They can buy in bulk and often at lower prices than smaller competitors
What is the effect of geography on diseconomies of scale?
Transportation of finished products over long distances can increase costs and complicate management
Fill in the blank: A firm experiences _______ returns to scale when output increases by a smaller percentage than inputs.
Decreasing
True or False: Constant returns to scale occur when firms increase inputs and receive an equal percentage increase in output.
True
What is the relationship between short-run average cost (SRAC) and long-run average cost (LRAC) curves?
LRAC is an envelope for all associated SRAC curves
What happens to the average fixed cost curve (AFC) as output increases?
AFC falls as fixed costs are divided by a larger output
What is the significance of the point where the LRAC curve levels off?
It indicates the minimum efficient scale
What are diseconomies of scale?
Diseconomies of scale occur when a firm’s costs per unit increase as it grows larger.
How can workers’ motivation be affected in a large business?
Workers may feel their efforts go unnoticed, leading to decreased motivation and personal commitment.
What geographical issues can large firms face?
Large firms may struggle with the transportation of finished products over long distances and controlling distant parts of the business.
Why might a large firm struggle to respond to change?
It takes much longer and is more difficult for a large firm to adapt to changes.
How does the demand for raw materials affect production costs in a growing business?
Increased demand for raw materials can raise prices and thus increase production costs.
What are the challenges of management in a growing business?
Coordination and control become more difficult, leading to poorer quality work and less effective business decisions.
How does communication change in a large business?
Communication can become slow and lose accuracy due to distance and the number of people involved.
What is the definition of profit?
Profit is the difference between revenue and costs.
What is the condition for profit maximization?
Profit is maximized when total revenue (TR) is above total costs (TC) and when marginal cost (MC) equals marginal revenue (MR).
What is normal profit?
Normal profit is the return sufficient to keep the factors of production committed to the business.
What indicates supernormal profit?
Supernormal profit occurs when average revenue (AR) is greater than average cost (AC) or when total revenue (TR) exceeds total costs (TC).
What constitutes a loss for a firm?
A loss occurs when average revenue (AR) is less than average cost (AC) or when total revenue (TR) is less than total costs (TC).
What is the short-run shut-down point?
The short-run shut-down point is where average variable cost (AVC) equals average revenue (AR).
When should a firm continue production despite making a loss?
A firm should continue production if AVC is less than AR, as it helps to cover some fixed costs.
When should a firm shut down immediately?
A firm should shut down if AVC is greater than AR, as producing more will increase the loss.
What is the long-run requirement for a firm to stay in the industry?
In the long run, a firm needs to make at least normal profit to remain in the industry.
What is the relationship between MR and MC at the profit-maximizing output?
The profit-maximizing output occurs where marginal revenue (MR) equals marginal cost (MC).
Fill in the blank: A loss is where the firm fails to cover its costs, _______.
AR < AC or TR < TC
